[The] real problem with focusing on the profit motive is that it assumes that the primary role of profits is to motivate (or in contemporary language “incentivize”) producers. If one takes that view, it might seem relatively easy to find other ways to motivate them or to design a new system where production is taken over by the state. However, if the more important role of profits is to communicate knowledge about the efficiency of resource use and enable producers to learn what they are doing well or poorly, the argument becomes much more complicated. Now the critics must explain what in the absence of profits will tell producers what they should and should not do. Eliminating profit-seeking from an industry doesn’t just require that a new incentive be found but that a new way of learning be developed as well. Profit is not just a motive; it is also integral to the irreplaceable social learning process of the market. Critics may consider eliminating the profit motive the equivalent of giving the Tin Man from Oz a heart; in fact it’s much more like Oedipus’ gouging out his own eyes.

Amen.

However, we do have one quibble.*  We believe that “profit motive” is a misnomer and it is mistaken to assume that profit is a motive.  This goes back to wanting to be very careful in the words we allow the government to use to describe our activities.

We’d argue that “profit” is not a motive, but a signal or measurement of how well we’re pursuing a true motive.

The true motive in all productive undertaking by individuals is the acquisition of a higher and better standard of living. Profit (in a free-market) is the signal to a provider that she is both delivering to others, and achieving for herself, a higher living standard.

So let’s call it by the more accurate “improved standard of living motive”

The “spread” between the cost (to you) of a service you provide and the price paid you is a measure of how well you are adding value in the world.  If it were a mathematical formula, it would be expressed:

Price customer pays for good in free market – cost to you to provide the good = Measure of how well you are improving living standards for yourself and others

When people are willing to pay higher prices for the goods or services you are delivering, it is a sign that they are voluntarily giving up a good they have in their possession for another good you can provide them, because they believe they will be better off and have a better standard of living.  If you fail to provide them with that promise, they will not trade with you.  Rising price (again, in the presence of free markets and also the absence of inflation) is a sign that you are increasingly providing goods people believe will improve their standard of living.

Now, the lower your costs are for the services you provide, the more efficiently and less wastefully you are providing the service.  Cost, relative to price, indicates how well you conserve scarce resources, how well you use and allocate scarce resource.  That is, your ability to lower your costs of production relative to your prices is a signal that you are utilizing resources well.

Those that utilize resource well have more profit.  They then are rewarded with growth options through reinvestment of those profits.  This is good.  Those that provide more value while using less resource should be rewarded, should be the ones providing more of this good or service to others.

More profit is not only reinvest-able, but also can be extracted from the business and spent for consumption purpose elsewhere (improving the entrepreneur’s standard of living and allowing others to improve theirs through the trade of their particular good or service).

Notice that competitors are now motivated to emulate the best practices of the best providers – increasing value delivered while simultaneously using resources more efficiently and less wastefully.

If the spread between cost and price is widening (another way of saying profits are increasing), it is a sign that the standard of living is increasing for everyone – both you and others. You are using less units of a scarce resource to provide an ever-more-valuable-and-useful good to others.

Absent a free market, profits may be passing along distorted information and may not be a sign that standards of living are improving for others, but in a free market profit is a feedback mechanism that confirms to you that you are engaging in right action and maximizing the standard of living for yourself and others.

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*Our quibble is not with Prof. Horowitz so much as it is with the use of the phrase “profit motive” in general to describe what it is that motivates entrepreneurs.

This period is no different.  It is more painful and more dark than most generations have experienced, but it is not unprecedented and it is not insurmountable.

The various “stimulus” and “bailout” plans the government undertook were not necessary and have not helped out recovery, but have actually impeded it.  Recovery was already underway when the bust occurred – the bust was the first step in stopping all of the insane practices that cheap-money fed lending has brought about.  The stimulus and bailouts have prevented the adjustment from happening more quickly by propping up businesses that should otherwise have gone under or been restructured or sold to efficient operators much more quickly.  But there it is . . . no use dwelling on things no longer in our control.

The acceleration in job losses was the inevitable response to the excesses of the tech-bust/post-9.11 stimulus.   Loose money lending  led to a debt binge that not only saddled many individuals and businesses with too much leverage, but also led to a misallocation of jobs and resources, so that people were employed in short-term projects (i.e. an excess of housing-related projects that were not sustainable long terms) and capital was deployed into companies that did not have long-term prospects (again, primarily housing related businesses, mortgage companies, etc). The only way through this is for capital and people to migrate to industries with real, non-artificial demand, and for the debt burden to be worked off, whether by paying it down or through defaults.

The artificial boom led to an inevitable bust which resulted in dislocations in nearly every market.  We’re all feeling it.

The hangover is proportional to the binge.

Government’s penchant for bailing out their Capitalist Cronies meant that bad behavior was rewarded for many, and many whose behavior was unimpeachable have been handed the tab and punished.  But there’s no crying in baseball.  Politicians and governments have been corrupt since the dawn of man.  It’s no different now.  In 1,000 years – don’t worry, we’ll all be gone by then -  it will be no different.  The key is to understand this and just do your best to combat it.  We aren’t called upon to win, we’re called upon to fight.  By fighting we ensure that the injustices are less than they’d otherwise be.

It is true is that the American economy – and it’s citizens relationship with government – is forever altered.  The policies undertaken have slowed recovery and set a horrible precedent – that bad behavior will be bailed out and good behavior will be punished by coercing responsible parties to underwrite the bailouts for the irresponsible ones.  The actions that were undertaken have undermined prosperity in the long-run, and we’ve kicked the can for future generations to deal with.

But will the economy eventually be back?  Yes.

It will be back in spite of the actions undertaken by government.

Who will lead the economy back?  Small businesses have led the recovery in the last seven recession, according to the Kauffman Foundation.  Just like most every other time it’s happened, it will be the people in the economy providing the goods and services in their communities.  It will be led by small businesses, by the people who, when they either lost it all or faced that prospect, got up the next day and went about figuring out how to create value in the world. People will buy and trade service and goods that are needed to improve the standard of living.  You will continue to work each day to better the lives of others.  And others will work to better your life.  You will, in a free market, find one another and be blessed by your trade.

If you were in an unsustainable – boom induced – line of work, you’ll migrate to another line and hopefully not one of those that will be artificially created by the new round of stimulus;(for example, some of the “green jobs” that have been artificially created by Big Government, which are resulting in new resource misallocation and are where the new “bust” will likely occur… however, green jobs that are market driven will be OK, those driven by real demand and not by government mandate.

When the recovery eventually occurs, AND IT WILL, Big Government will try and take credit.  However, you will know that that’s like trying to take credit for the sun coming up.  It was going to happen anyway, in SPITE of the obstacles big government laid in the way by preventing the economy from naturally correcting itself, and would have happened much sooner if Government had left worse well-enough alone.

Good will come of this.  If nothing else, people, more than ever, have been alerted to the fact that Big Government cannot save them.  Government is just a group of people who are no more competent or benevolent than any others (and, in fact, are largely less benevolent and competent than your average American citizen).

If nothing else comes of this but people learning to avoid the excesses that come during cheap money and credit booms, something good will have been learned.

If nothing else comes of this but the ability to audit the fed, and thereby begin the process of preventing future cheap-money booms (that lead to these busts), some good will have come of this.

As small business owners and employees this is a painful time for us, but it’s not the end.  It’s a beginning.  It’s a time to fight, a time to save, a time to innovate, and a time to recommit to the ideals of a free people.  It’s a time to condemn tyranny and waste wherever it’s found.

It’s a good time to be alive.

And just don’t forget – when things turn around, and they eventually will, it will be because of the efforts of people like you who, in spite of the obstacles of Big Government, will overcome and prosper again.

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Most people dislike taxes but see at least some level of tax as inevitable, even necessary.  Surely some of our dislike for taxes is driven by the fact that it’s human nature for us to want to keep more of what we earn and to direct where it’s spent rather than abdicate that decision to another person.

Some of our dislike is driven by the fact that we inherently oppose wastefulness and don’t like to see our money spent on things we believe are inefficient or unnecessary. Some of our dislike comes from seeing our money spent on activities that we consider immoral or unethical.

And many of us dislike taxation because we believe it takes money away from producing things that people want – its best use – and instead is diverted into uses that are less valuable to society, and even are often used to prop up government-sponsored monopolies that the private market isn’t allowed to compete with, preventing us all from having a better quality of life.

But one thing is sure, the taxes you pay out of your earnings are dollars that you will not be able to spend to improve your life or reinvest in your business to create additional goods or services, increase your workers salaries, hire new workers, donate to a charity, or spend in your community.

Every dollar taken from your business is a dollar you can’t spend at another business, use to send a child to college, or donate to a charity.  Every dollar taken from you is a dollar you can’t lend to another business owner.

If politicians are truly serious about stimulating the economy, they will cut taxes.  Period.

America already has a deeply flawed tax system.  In fact, the Tax Oppression Index ranks America in the bottom half of Industrialized Nations, and our ranking is set to plummet further.

Taxation often sends a discouraging message, “You cannot be trusted to do with your money things that will make the world better off, therefore it must be confiscated and given to those who know better than you.”

Have no doubt that many politicians would like take everything you earn, and give you back whatever they feel is “just,” if only you’d keep working.  They’ve learned, though, that at some point the burden is just so great that many people finally throw up their hands and won’t work.

The federal government – and many state and local governments – treats the country as something it owns and allows you to use, so long as you pay your “dues.”  Don’t believe it?  Think you “own” your “property”?  Try not paying your property taxes.  You’ll ultimately lose “your” property.  That’s the “dues” you pay for the privilege of the government allowing you to “own” something.  The way they see it, they own the country, you rent from them.

Even your own body and labor.  They own it, to the tune of whatever they decide.  Sometimes they decide to own 10% of your work.  Sometimes 40%.  Sometimes 90%.

They claim you and everything you possess.

Taxation without your consent is theft, but what can you do?

What you can do is educate others to see the reality of our system today so that it can be reformed.

It starts with an understanding that government is not a magic institution that can wave its wand and turn us into a utopia, if only we feed it.  It’s an institution made up of people who are no more benevolent and competent than the people and businesses they take from.

It starts with an understanding that, yes, we can be trusted with our lives, our liberties, and our properties, and that we can use those resources we have earned better than those who have not earned them, but merely confiscated them from us.

It starts with an understanding that every dollar of taxed income incurs an opportunity cost, which is the choice you no longer have and can’t make because that dollar was taken away from you.

It starts with an understanding that competition lowers prices, an understanding that when a government carves out a monopoly for itself in any market, and does not allow for competition, we’ll all pay way too much for the “service” provided.

Here are some exercises you can use to teach your employees and coworkers about the “hidden costs” or “perils” of taxation.  Embedded in the message is a warning that if they value job security and personal prosperity, they should never vote for a tax increase on themselves or on anyone else.

Let’s look at a couple of simple profit and loss statements – two companies with identical performance, but one is not taxed at all, while the other is taxed at 40%.

Now, assume that every $30K reinvested each year creates one job.  This may or may not be accurate for your business, but it is for mine, so it will work for illustration purposes.

That’s a 65% increase in job creation.  That’s enormous.

That money could also be used to fund an employee retirement plan, or give employees a raise, or just have a big enough savings that during an economic downturn a company can weather the storm and not have to lay off employees.  That’s job security.

And, remember, the money we spend with other companies creates jobs there, too!  That cash is either reinvested in business, reinvested somewhere else, or spent in some local economy.

Now, what happens if your customers’ individual tax rate goes from, say 20%, to 0%?

They have more money to spend on your goods or invest in or loan to your business.

What happens if the rate goes up?  Just the opposite.  Resources and cash are diverted away from your customers (and potential customers).

Help employees understand that sales taxes reduce the amount of money customers spend with you.  If a customer has only $100 of discretionary income they’re willing to spend with you, $94 of their available income will go to you and $6 will go to the government.  That 7% extra you could have makes an enormous difference over the life of a company.

When a politician says, “I’m going to take from someone else – not you – to pay for my pet program,” we must all remember that other person who has been targeted may someday be – or already is – our customer.

We should never vote to take away someone else’s purchasing power.  Even when politicians are making Robin Hood arguments and saying they’re going to take from someone and give it to us, we must resist the temptation to burden others.  We should, “Do unto others as we’d have done unto us” and all that.

A tax increase is a freedom or choice decrease.  It takes away options from businesses and individuals.  A tax decrease is a freedom or choice increase that provides new opportunities to individuals and businesses.

Just as someone’s death leaves us wondering “what might have been” had they lived, taxation leaves us wondering what “might have been” had we been able to determine how our money would be used.

What children weren’t able to go to college because their parents were overtaxed?  What businesses were never launched, what discoveries were never made, what lives were not saved because of innovations never pursued, all because the resources and money that could have been used in those pursuits was confiscated?

Now you might be thinking, what about schools?  What about roads?  What about . . . ?  Those are valid thoughts.

While some may argue for the abolition of all coercive taxes, and others may oppose that or think it unrealistic, I think we can all agree that lower taxes is good for everyone.

And don’t underestimate how much cheaper and quicker private citizens can get things done when they are able to compete with government monopolies.

Let’s assume all tax is abolished.  What might happen?

Well, the dollars you were spending on tax for school funding, or roads, or downtown arts centers is now back in your pocket.  All the money you spent on any government service is now back in your pocket.

Will we all just go without?

No.

Any service provided by government that was of any value will find lots of people in the free market (who now have more money to invest and spend) who are willing and able to meet those needs.

That saved money will still be invested and spent, but it will now be at your discretion and by your choice.

Let’s also remember that if a service is received where the tax is paid, it more closely resembles free trade.

If a service is not delivered where the tax is paid, it more closely resembles theft.

Taxes paid should be paid where the benefits for paying them are delivered directly to those paying them.

Most people are willing to pay a local tax to support a local school where their children or the children in their community attend or to pave roads in the communities where they live.  At the local level these things are best worked out.

Most of us are not willing to pay a federal tax used to support abortion delivery services in Mexico  – whether we’re opposed to abortion or not -  or funding opera in Washington DC, or financially backing research on the sexual behavior of gay Argentines.

Last year many of us worked 2-4 months out of the year for the government.  That is, when the year was over the government took roughly 15-35% of our incomes.

The American Revolution was fought because of burdens far less than that!

We must educate our employees and co-workers about the benefits of low taxes (and of lowering taxes), of services rendered where taxes are paid.

You can use the examples above to show them how low taxes gives them job security and increases their earning potential.

When people are taught free market principles, they understand them.  They can see through the smokescreen that Big Government propagandists throw their way if you help them see through it.

If you own a business, consider showing your employees how taxation affects your profit and loss statement and how personal income taxes limit what people can spend with your business.  It will help them understand that high taxes directly affect them and limit their current and future choices and freedoms.  Help them understand the immorality of voting for a tax increase on someone else while exempting themselves.

Please share your ideas with us in the comments below.  Is this sort of educating feasible in your workplace?  Are people responsive to this message or apathetic?  What more can be done?

If SBABG.org were to prepare printable fliers or pamphlets that contain this information in a summarized form, would you be interested in distributing them to your co-workers or employees?

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The Public Plan Deception – It’s Not About Choice

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